Could Bankruptcy Help BP Oil Plug its Cash Leak?

As the liability ticker continues its rapid upward ascent for BP, the company has begun pondering the merits of filing for bankruptcy.

In a recent article, The Atlantic discussed what bankruptcy might mean for BP, the government, and gulf coast residents.

How Would Bankruptcy Effect BP?

For corporations under financial stress, filing for Chapter 11 bankruptcy offers similar benefits as Chapter 13 does for individuals. Specifically, both types of bankruptcy allow filing parties to reorganize their debts, which can dramatically reduce their total debts owed.

So, on the positive side of the ledger, bankruptcy could allow BP to reduce its debts, and perhaps free it from a large portion of the cost of clean-up efforts. Plus, by reorganizing its debts under a new company, BP could wall off the parent company from the bulk of the liabilities.

However, filing for bankruptcy is still a risky option for BP. Bankruptcy proceedings for BP would be extremely costly due to the vast amount of work necessary to parse the finances of a multinational conglomerate.

If BP determines that paying damages to injured Gulf Coast residents would cost less than filing for bankruptcy, it may shy away from bankruptcy court.

What Sort of Company Would Emerge?

According to reports, BP might cut loose its American subsidiary, BP America, and hold that branch solely responsible for the spill. Thus, BP could wall off billions of debt from its non-American businesses.

Of course, this measure would hinder the ability of BP America to pay its necessary debts. Another option would be to file the entire company in bankruptcy court in London. However, American litigants may not fare well in a foreign court, especially in the home country of the company itself.

What About Gulf Coast Residents and the Government?

If BP successfully files for bankruptcy, it may free itself from the responsibility of compensating Gulf Coast residents for injuries they suffered as a result of the oil spill.

Thus, another loser in the event of a BP bankruptcy would be the federal government, which would likely bear the responsibility of paying for the clean-up effort and paying damages to injured parties.

Due to the high stakes of filing for bankruptcy, BP will likely take its time in making its decision. In the meantime, the federal government and residents of the Gulf Coast nervously await the company’s decision.

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